from the your-estimates-seem-a-little-high dept

So (for good reason), we keep noting that if you want to see how the American broadband market really works, you should take a close look at West Virginia. As in most states, a lack of competition keeps broadband prices high and speeds slow, with far too many consumers forced to pay a tidy sum for DSL speeds circa 2002. But the state has also been embroiled in scandal after scandal involving Frontier Communication's mismanagement of taxpayer subsidies that were intended to try and resolve this problem.

Local Charleston Gazette reporter Eric Eyre has quietly done an amazing job the last few years chronicling West Virginia's immense broadband dysfunction, from the State's use of broadband stimulus subsidies on unused, overpowered routers and overpaid, redundant consultants, to state leaders' attempts to bury reports supporting allegations that Frontier engaged in systemic, statewide fraud on the taxpayer dime.

Eyre is back again directing readers to a new report by the US Commerce Department's Office of Inspector General (pdf) which found that Frontier pretty consistently tried to game the subsidy system, imposing various "loading" and "invoice processing" fees -- outlawed by federal grant rules governing stimulus funding -- on to invoices submitted to the state. Frontier consistently used these fees to pad their bills to the tune of $4.7 million, and internal memos feature employees clearly demonstrating that Frontier saw this bill padding as a way to glean some additional profit on the taxpayer's dime:

The scathing, 31-page report declared the payments "unreasonable" and "unallowable." Meanwhile, Frontier saw the tacked-on charges as a “revenue opportunity,” according to an internal company email cited in the report. Frontier employees referred to the extra fees as “markups” and “profit."

Keep in mind Frontier had already been fighting a lawsuit alleging that it used a wide variety of tricks to both jack up its original estimates for broadband deployment -- and ensure any subsidies would only be used to shore up Frontier's internal networks, and not to improve overall broadband penetration and competition in the state. This new report notes that one of the tricks used by Frontier was to order and store a massive amount of unused fiber for future "repairs," allowing it to bill more than projects actually cost:

"What’s more, Frontier misled the public about the amount of unused fiber cable — called “maintenance coil” — the company installed across the state, according to the report. The extra fiber, which is stored at public facilities and used for repairs, drove up the broadband expansion project’s cost. Frontier wound up placing 49 miles of spooled-up, unused fiber across West Virginia — four times the amount the company had disclosed to state officials, according to the report.

Unsurprisingly, Frontier insists it has done nothing wrong, despite years of similar allegations across the state. This is the same Frontier that just got done firing a seven year employee because, at his part-time job as West Virginia senate leader, he voted for a new law that would actually help improve broadband penetration and competition in the state. Oddly, state officials (many of the same ones that tried to bury reports alleging the same sort of thing earlier) aren't commenting on the report's findings.

It should be noted that this is how state politics has worked for years for the likes of AT&T and Verizon, who long found it easy to gobble up subsidies and tax breaks, then pay state lawmakers and regulators to look the other way when it came time for accountability over how subsidies are spent. More often than not, these companies are simultaneously being allowed to quite literally write state telecommunications law ensuring that competition in the broadband sector remains muted. All while everybody in the chain professes their unwavering dedication to free markets and consumer welfare.

But Frontier has neither the competency nor the legal and accounting firepower of its larger counterparts, and as it has stumbled closer to bankruptcy courtesy of some questionable business decisions over the last few years, keeping formerly loyal state politicians and regulators consistently looking the other direction has proven increasingly difficult. Still, believing that this ends with anything even remotely resembling accountability and justice remains a very risky wager.

from the dysfunction-junction dept

As we've covered at length, the United States' 2010 National Broadband Plan was a bit of a dud. It paid a lot of lip service to improving broadband competition but was hollow to its core, using politically-safe rhetoric and easily-obtainable goals to help pretend the government had a plan to fix the nation's uncompetitive broadband duopoly. But while the NBP was a show pony, the companion plan to use $7.5 billion of the Recovery Act stimulus fund to shore up last and middle mile networks was supposed to have been notably more productive.

Or not.

Of that $7.5 billion (out of the Act's $840 billion total), $3.5 billion was set aside to help improve broadband connectivity in the nation's harder to reach areas. The funds were managed by the USDA's Rural Utilities Service (RUS), who then doled out the funds as needed to those who applied with sensible business models. But a recent report by Politico suggests that the program has what you might call a spotty success record:

"A POLITICO investigation has found that roughly half of the nearly 300 projects RUS approved as part of the 2009 Recovery Act have not yet drawn down the full amounts they were awarded. All RUS-funded infrastructure projects were supposed to have completed construction by the end of June, but the agency has declined to say whether these rural networks have been completed. More than 40 of the projects RUS initially approved never got started at all, raising questions about how RUS screened its applicants and made its decisions in the first place."

If these programs don't pull their full awarded amount by September, the awards are forfeited, and can't be used by areas that would have otherwise benefited. Of course if you've followed the broadband industry at all over the years, you might recall that these broadband gaps aren't supposed to exist in the first place. We've thrown billions upon billions in tax cuts and subsidies at incumbent companies like AT&T and Verizon over a generation, and the result has fairly consistently been broken promises, zero accountability, and a government that repeatedly makes it clear they're ok with that.

And just like these programs of old, the RUS broadband effort threw money around without actually knowing where it was going:

"We are left with a program that spent $3 billion,” Mark Goldstein, an investigator at the Government Accountability Office, told POLITICO, “and we really don’t know what became of it."

And here's the kicker: the Politico report doesn't even highlight some of the worst fraud seen in the program. Earlier this year we noted how West Virginia was the poster child for this program's dysfunction, with Verizon, Cisco and Frontier convincing the state to spend millions in broadband subsidies on over-powered, unused routers, redundant, useless consultants, and "upgrades" that appear to have benefited nobody. The state then buried a consultant's report highlighting how companies and state leaders engaged in systemic, statewide fraud on the taxpayer dime. Nothing much has happened since.

While the continued failures of broadband subsidies will be used as an example that broadband subsidies don't work, they're more an example of how we're utterly unwilling to fix campaign finance reform. Spending and tracking this money shouldn't have been all that hard; we just aren't willing to clean up a political system beholden to unaccountable giants before throwing billions of dollars into its angry maw. Meanwhile, when you have armies of politicians consistently and proudly running on the platform that government can never work, the fruit of this labor can't be all that much of a surprise.

from the we-don't-appear-to-be-learning-anything dept

Time and time again we're told by incumbent ISPs that if lawmakers give them "X," we'll soon be awash in all manner of miraculous network investment and job creation. Sometimes "X" is an acquisition, as when AT&T promised to magically increase competition if it was allowed to remove T-Mobile from the marketplace. Often "X" is broad deregulation. Other times it's significant regulation of they other guy. Sometimes it's just subsidies. Lately we've been told that if we only don't apply net neutrality rules, we'll be awash in amazing network investment and next-generation broadband in no time.

Of course, if you stop and actually pay attention, time and time again you'll shockingly find that these repeated telecom Utopias never arrive, and by giving your favorite lumbering telecom duopolist everything it wants, things generally only get worse. Deregulate AT&T broadly in California under promise that you'll see lower rates and greater competition, for example, and watch miraculously how things actually get worse (and nobody wants to talk about it). AT&T's currently telling state lawmakers that if they gut all regulations requiring it maintain DSL and POTS networks (so AT&T can hang up on users it doesn't want to upgrade) we'll soon be awash in the technology miracles of tomorrow. Downgrades are upgrades, you see.

"X" is also all-too-frequently tax breaks and incentives. You might recall that Verizon promised the States of New Jersey and Pennsylvania it would deliver fiber broadband to every home in exchange for billions in tax cuts. After getting the incentives Verizon simply threw money at the States, and a decade later both States were willing to forget Verizon's obligations entirely.

Similarly, the Wall Street Journal recently dug through the history books, and found that bonus depreciation -- imposed as part of the 2008 Stimulus Act and pushed for by the telcos to spur job creation and investment -- also never delivered the goods. Essentially an interest-free loan that lets companies defer tax obligations, the Journal notes that, once again, the promised job growth and investment spikes never actually happened:

"But that isn’t how it has worked, at least at AT&T and Verizon, whose vast networks of towers and cables make them two of the country’s biggest investors in infrastructure. AT&T estimated its federal tax bill last year at $3 billion, down from about $5.9 billion in 2007, before the tax relief was enacted. Verizon estimated that it would get $197 million back last year, compared with a 2007 bill of $2.6 billion. Meanwhile, the companies have kept their capital spending relatively flat since the stimulus was adopted, and their employee count has dropped by more than 100,000 people, a fifth of their combined work forces."

This was, the Journal notes, despite studies years earlier clearly illustrating that bonus depreciation didn't really work, though AT&T (as it does with everything) is threatening reduced investment if the policies aren't extended. While wireless spending remains strong, the Journal fails to note that AT&T's fixed-line investment has actually been dropping significantly -- even while the company pretends to be expanding gigabit fiber to get its DirecTV acquisition approved by regulators. It's a never-ending cycle of bluffing and bullshit, and at some point you'd think we'd stop and realize that maybe just giving lumbering, pampered duopolists absolutely everything they want may not be the quickest path to telecom nirvana.

from the if-they're-all-upset,-that's-a-sign dept

We've had a lot of concerns about the broadband stimulus package, since it was shaping up to look like little more than a handout to incumbent operators who have a long history of grabbing public money, then not living up to the promises they made to get it. The real problem underlying most issues having to do with broadband in the US is a lack of competition, so any stimulus needs to address that, instead of just throwing money blindly at broadband providers. Mobile operators have already complained about anything that might force them to compete interfering with the government broadband giveaway; now BusinessWeek reports that several incumbent telcos are holding back from the stimulus, because they're afraid the government will attach strings to it to try and increase competition. Most of all, they're worried they may have to allow line-sharing, which, of course, they worked very hard to get tossed out in 2005. The rules are still under discussion, but we're optimistic that the opportunity to effect some positive change on the broadband market won't get left behind in the rush to throw money at it.

from the startups-are-about-short-term-job-destruction dept

Earlier this week, I was on a fun panel put together by the Telecom Council of Silicon Valley, which was mainly focused on what the Obama Stimulus plan (and the broadband allocation specifically) would most likely mean for the industry. At one point, an attendee in the audience said that he was from a startup, and questioned how he might partake of the stimulus funds -- and I responded, perhaps flippantly, that he was out of luck: the stimulus isn't for startups. That's not entirely true, of course. There will be some token amounts of money handed out to startups, but pretty much everyone on the panel agreed, the administration has made clear that the stimulus package is about creating jobs as quickly as possible, and the administration has made it clear in so many words that this means handing it to incumbents. They've been pretty frank that the stimulus plan has a lot less to do with increasing broadband capabilities than with job creations -- and plans to get funds that show more job creation will get preference over those that actually increase broadband.

And that's why the stimulus package is not for startups -- and is potentially dangerous in the long run. Truly revolutionary startups don't immediately create jobs -- they destroy them. The process of creative destruction takes on those incumbent providers and wipes them out. We're seeing it with plenty of industries today that are challenged by new upstarts that have upset their old business models. And, while most economists should recognize that this process is good for the overall economy, in that it leads to economic growth and more efficiency, it does upset the status quo, and causes many big companies to contract or disappear altogether.

So, think about it from a government bureaucrat's perspective right now. Go back a few decades, and assume someone came to you with a plan to create the internet -- and even accurately described how it would allow a great free exchange of information. The reaction, if you were trying to deal with an economic crisis, would be to focus on all of the jobs it upset. People can share music online? Think of all the job losses in the music industry! People can read news for free? Think of all those newspapers shutting down! But they wouldn't consider all of the economic activity created by the internet -- the billions of dollars and millions of new jobs created thanks to it.

If, today, you had a concept for a totally new technology that would greatly increase broadband access across the globe, in a revolutionary way. It would allow anyone to have super high speed access anywhere. It wouldn't be that costly to create or build or even maintain... and it wouldn't even require making use of existing infrastructure. From any normal calculation this would be fantastic. It would spur enormous new economic growth opportunities and speed along our economy in massively useful ways. Yet, it's exactly the type of project the government would be against right now -- because it would make AT&T, Verizon and others obsolete... and think of how many people that would put out of work, at the same time that the gov't wants to claim how many jobs it's created.

That's an extreme hypothetical, but it's useful in illustrating the point. So, this focus on using the stimulus for short-term job creation is dangerous in that it will likely be used to prop up existing incumbent businesses, because they can create the most jobs most quickly -- by doing very inefficient things. The startups that do things more efficiently end up doing short term job destruction, even if the long-term results would be a much larger, more stable economy with larger job creation.

from the they-wanted-job-creation... dept

This probably isn't much of a surprise for most folks, but scammers have wasted no time at all in using news about the massive government stimulus plan to try to trick suckers into various scams. Many of these are scams trying to get people to sign up to pay a "fee" to find out how they can get their "stimulus check" even though the stimulus program isn't sending out checks to individuals. Expect to see plenty more similar scams as well.

from the time-to-work-smarter dept

Thomas Friedman has stirred up some controversy with his suggestion that the government (instead of giving it to dying automakers) should give $20 billion to top venture capital firms and have them invest in new innovation. The initial thought makes sense, and, in fact, we discussed something quite similar a few months ago -- though, concerning a new venture fund in the UK, rather than giving money to existing funds. Indeed, if we must throw money at the economy, it should be to invest in new innovation, rather than throwing good money after bad. However, Fred Wilson points out that the top VC firms don't want or need the cash, and in fact, adding more money to the venture investing pool at this point might cause a lot more harm than good.

And, that brings up an important point, worth discussing, that the government seems to be missing: throwing money at problems is very rarely the best solution. Often the problems are caused by too much money sloshing around (see: Wall Street). Dumping more money into the system just encourages the same inefficiencies and bad decision making. The real fix to problems is to wipe out the broken parts of the system, not fund them further. Yes, letting some of these businesses fail will have rippling effects into other parts of the economy -- but shouldn't the focus be on helping out those aspects, rather than rewarding companies like GM and Chrysler that have screwed up dreadfully?

While there's something to be said for taking money when it's available, plenty of experienced entrepreneurs know that having too much money on hand is almost as bad as not having enough. Having too little money makes you focus and makes you creative out of necessity. Having too much money makes you lazy and puts you in a position to hide or ignore the real issues for way too long. What we should be working on right now is fixing the systemic problems throughout our economy -- not papering them over with cash.

from the 9-lives dept

Broadband over powerline has gotten lots and lots of attention and investment over the past decade or so, but remains little more than a black hole of hype. Every once in a while, a story comes along to remind us that despite its near-total lack of traction, BPL abides. Now it could apparently be in line to get some money from the economic stimulus bill. We've been skeptical of any broadband stimulus, in large part because it looked more like handouts to incumbents than anything meaningful. But putting more money towards BPL, given its market failure and lack of progress, would be shambolic.

from the unfortunate-and-worrisome dept

As was widely expected, President Obama signed the stimulus bill into law yesterday. And, with it, the administration has set up Recovery.gov in an effort to be transparent. That's leading to some reasonable confusion because the bill actually called for an independent Recovery Accountability and Transparency Board to create a website for transparency. Recovery.gov is not at all independent and is maintained by the White House.

But, I think there's a more important issue to be discussed here: which is that this is transparency after the fact. If the administration were serious about transparency in this process why wasn't their transparency and openness during the process? The success of the Obama campaign was, in part, because it included people in the process, and let them help define where things went. There was no evidence (at all) of that happening in this case. Instead, nearly a trillion dollars of debt was allocated through backroom dealing all done by long-term politicians, with no input from outsiders. Then, we the people were given almost no time to actually look at or review the content.

That's not transparency. That's not participation.

To then tell us after the fact that you've set up a website to hear from people and be transparent seems way too little and way too late. It's not about providing the data after the decisions have been made. It's about letting people at least share their thoughts before such decisions have been made.

from the just-what-we-didn't-need dept

One of our big fears with the stimulus bill was that with such a huge deal, there would be plenty of small opportunities for lobbyists to slip in absolutely awful language. Well, it's happening. Sen. Feinstein has inserted language into the stimulus bill that would officially "allow network management" for "deterring unlawful activity" including "copyright infringement." Of course, right before "copyright infringement" it also lists "child pornography" because no politician wants to be seen as voting against something that stops child pornography. As Public Knowledge points out, the whole thing doesn't make much sense. Network management tools are different than content filtering tools -- so saying that the use of network management tools is necessary for the sake of content filtering is a red herring. And, if this does involve deep-packet inspection, as is implied by the amendment, it seems like a huge privacy violation, allowing an ISP to spy on everything you do online. Public Knowledge is trying to get out the word that this should not be allowed in the stimulus bill.